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Wednesday, February 3, 2010

Institutions, weather, culture and growth

I have been doing some reading on economic growth for my economic history class. One of the readings is the discussion (book review and interview) surrounding the publication of the 1998 book, The Wealth and Poverty of Nations: Why Some Are So Rich and Some Are So Poor by David Landes.

From what I can glean from these auxiliary sources, the book seems worthwhile. In the book, Landes tells a detailed economic history of Europe, including how weather patterns affected the optimal form of production (slave or non-slave labor). These broad weather patterns influenced the institutional framework (i.e., the rules of the game) that these societies set up. As Barry Eichengreen says in his review:

Europe's Industrial Revolution was, at the deepest level, a product of the Gulf Stream. The continent's mild summers permit intense physical activity, unlike the tropics, whose heat and humidity force even the most energetic to seek shelter from the midday sun, and where the incentive to find others to do hard labor accounts for the concentration of wealth and ultimately explains the rise of slave society, a form of economic and social organization incompatible with capitalist growth. As the author puts it with characteristic bluntness, "Where society is divided between a privileged few landowners and a large mass of poor, dependent, perhaps unfree laborers-in effect, between a school for laziness (or self-indulgence) over against a slough of despond-what is the incentive to change and improve?" Europe's cold winters suppressed pathogens and pests and rendered parasitism the exception, increasing the capacity of its natives for work. The continent enjoyed just the right amount of rainfall, between the extremes of desert, where crops died of thirst and topsoil eroded away, and the torrents of the Tropics, where jungle and rain forest crowded out settled agriculture.

More than just setting different legal rules of the game, this characterization of how weather ultimately became important is really a statement that informal institutions (norms, ethics, cultural rules of society) rule. Landes singles out the Protestant work ethic that was exported from Northern Europe to America:

The Reformation was a fundamental threat to the established church, which regarded intellectual and political novelty as subversive and persecuted nonconformists, prohibiting study abroad and stifling the spread of scientific knowledge. Landes argues that the anti-Protestant backlash sealed the fate of southern Europe for the next three hundred years. Southern Europe, in turn, exported its shortcomings to South America. In North America, by contrast, geography and the culture of dissent carried the day. Abundant free land created a society of small farmers and well-paid workers of unparalleled individualism, self-reliance, and initiative. Ample natural resources and an extensive consumer market, itself the product of a relatively level income distribution, led to the American system of manufactures, a form of industrial organization in which raw materials were intensively used to churn out standardized products using what ultimately developed into mass-production techniques. Even the American South, where climate and geography had encouraged the use of slave labor, quickly shed the lingering effects of its anticapitalist system once air conditioning freed it of its climatic handicap.

As an economist, I appreciate the appeal to the rules of the game. Indeed, I believe that institutions rule in terms of explaining differences in economic growth across nations. I also believe that these rules of the game are difficult to quantify and test. It is one thing to tell a coherent story that matches the facts. It is a much bigger accomplishment to also document the causes of those facts with a systematic analysis of the historical record and data. I think that's why the 2001 paper by Daron Acemoglu, Simon Johnson, and James Robinson (The Colonial Origins of Comparative Development: An Empirical Investigation) is so important.

These authors found a systematic test of Landes proposition that institutions rule (but they don't single out the Protestant/anti-Protestant dimension). The 2001 paper (commonly referred to as AJR) uses differences the settler mortality rate during colonization to predict differences in the types of institutions that were set up. If a lot of settlers died upon arrival, the colonizing country would set up extractive institutions (like slave-plantation systems) to exploit the resources without endangering their countrymen to the harshness of the wild. If not many settlers died upon arrival, the colonizing country would adopt institutions that make for a pleasant society.

And, if there is one thing economists know about institutions, it's that they change slowly -- So slowly that the institutions set up in the 1600s left a permanent mark on economic development four centuries later. Indeed, even after many revolutions, the countries that were settled under extractive institutions still have extractive institutions that closely resemble those set up during colonial times. Countries -- like the United States -- that were settled by people who wanted to live here are much better off by comparison.

When I first read the review of Landes' book, I wasn't impressed because I had previously read AJR. Then, I looked at the publication date. Landes documented his hypothesis in 1998 before AJR developed the test in 2001. That gave me a deeper appreciation for what the 1998 book purportedly accomplished. Next up? Maybe I'll read the original book.